Business Succession

5 Common Exit Strategies Entrepreneurs Can Consider When Planning Their Retirement

April 19, 2024

An image of a local CPA helping small business owners with their exit strategy.

Have you ever thought about what will happen to your business after you are gone? Sometimes, life takes priority. Maybe a medical emergency or need for urgent money, clearing debts, or old age could force you to take a permanent break from business and retire from being an entrepreneur. You don’t want to be in a position where you are lost and don’t know what to do while your business is slipping away. 

Things to Consider When Planning Business Exit Strategies 

An entrepreneur is a visionary and always plans for any and every situation. When planning your business exit strategy, keep in mind a few things: 

  • Understand the market value of your business and its demand in the market.
  • Make up your mind to approach the exit gradually or in one go. 
  • Look at your personal and family financial needs and which strategy is best for you. 
  • Make a note of any investors or creditors to be compensated as you exit the business. 

5 Common Business Exit Strategies 

This article examines some common business exit strategies and their tax implications. It will help you determine which one is best for you. 

Intergenerational Business Transfer

If you have children or family members who can look after the business, you could consider transferring ownership to them through prudent succession planning. This strategy can help you keep the business in the family and allow your future generation to continue your legacy, culture, and values. As you know who will take over the business, you can train them from a young age. 

However, controlling the business can sometimes cause family disputes. The next generation may also lack business acumen or not want to take over. The key to a successful succession plan is clear and transparent communication. It is advisable to write down the plan and keep everyone on the same page.  

Management Buyout 

If you don’t have family members who can take over the business, you could consider selling it to employees and partners through a management buyout. Knowing they will get ownership one day can motivate employees to grow the company. You can make the transition smooth by transferring day-to-day operations, making yourself redundant. 

Tax Implications When You Sell Business to People You Know 

The transfer of shares, even to children or employees, could trigger a significant capital gain tax as a transfer is considered a sale of shares. However, you can enter into a selling agreement wherein you transfer shares gradually, thereby deferring your taxes. 

Or you could consider an estate freeze, wherein you convert your shares into preferential shares and issue new equity shares to the heirs. This way, you can lock in capital gain and gradually reduce it by selling preferential shares throughout retirement. A sale over time can keep your taxes in check, avoiding a huge tax bill from a lump sum payment.  

Sell Business to a Competitor or Investor 

Another strategy is to sell your business to a competitor or an investor. But for this, your business should be attractive to a buyer. And finding the right buyer for your business could be difficult. If you decide to go with this strategy, you have to work on two fronts. First, make your business profitable to enhance its value. You can get a business valuation done by a professional and seek the help of a business consultant to enhance the value to fetch a better price. 

Second, look for a strategic buyer who can give you a premium for the business. For instance, sometimes companies buy out their competitors. Such a deal can fetch you a premium as it is easier to expand by acquiring ready-made businesses than building them from scratch. But the timing must be perfect, and your business should be in the trend. 

Many times, if a company acquires your company, they might offer you a position in the company. Understand roles, responsibilities, and new business culture and see if you are comfortable with it because an acquisition leads to significant layoffs and a stark change in the culture and values. This transition may not be as smooth as selling the business to someone familiar. 

Initial Public Offering (IPO) 

Another strategy, a bit more complex, is the public listing of the company through an IPO. Going public is expensive and has many legal and reporting requirements. Most companies use IPOs to raise money, but you can also sell your shares and reduce your stake. Once listed, the control is diluted, and decision-making becomes lengthy as you need board approval for major decisions.

While going public is very profitable as you can sell your shares on the exchange, it is a tedious path that needs professional help. Moreover, taxes get complicated. Compare the costs and benefits before considering this strategy. 

Liquidating Your Business Assets 

When none of the above is the option, liquidation is the last resort. This strategy is generally used to repay debt. In liquidation, you close the business, sell the assets, and use the sale proceeds to repay creditors. What is left is the taxable income of the business owner. There are liquidation experts who can guide you throughout the process. 

Another option for liquidation is paying yourself gradually, squeezing out as much cash as possible until the business finances run dry. These are called lifestyle businesses, and they are not here to grow or expand by reinvesting the money in the business. 

Tax Implications When You Sell Business to a Third Party 

You could get a large amount in one go when you sell the business to outsiders. In such cases, you could prepare your business to avail yourself of the lifetime capital gain exemption (LCGE). For 2024, the CRA will exempt $1,016,836 in capital gain from the sale of your business. To qualify for this exemption, 

  • 90% of the company’s assets should be in active business operations at the time of the disposition. 
  • 50% of the company’s assets should be in active business operations 24 months before the disposition. 
  • Only individuals, their relatives, or a partnership must own the business shares for at least 24 months before claiming the LCGE. 

Meeting the LCGE criteria requires intense planning and execution. Too much cash reserve in the company could breach the 90% assets in active business rule. You can consider any of the above strategies or a mix of several strategies. Many businesses are more valuable in parts. 

Contact KSSP Partners LLP in Markham to Help You with Business Exit Strategies 

A professional business consultant can help you evaluate your business’s worth and plan an exit strategy that will maximize its value. To learn how KSSP Partners LLP can help you plan and execute your business exit strategies, contact us online or by telephone at 289-554-5997.